Financial Audit
The Department of Health and Human Services's Fiscal Year 2004 Management Representation Letter on Its Financial Statements Gao ID: GAO-05-588R June 23, 2005The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and the Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. In connection with fulfilling our requirement to audit the fiscal year 2004 CFS, we evaluated the Department of the Treasury's (Treasury) financial reporting procedures and related internal control over the process for compiling the CFS, including the management representation letter provided us by Treasury and OMB. Written representation letters from management, required by U.S. generally accepted government auditing standards, ordinarily confirm oral representations given to the auditor, indicate and document the continuing appropriateness of those representations, and reduce the possibility of a misunderstanding between management and the auditor. The purpose of this report is to communicate our observations on the Department of Health and Human Services's (HHS) fiscal year 2004 management representation letter. Our objective is to help ensure that future management representation letters submitted by HHS are sufficient to help support Treasury and OMB's preparation of the CFS management representation letter and our ability to rely on the representations in that letter in combination with individual federal agency representation letters. We reviewed five key areas in each management representation letter: (1) signatures, (2) materiality thresholds, (3) representations, (4) summary of unadjusted misstatements, and (5) reliability of representations. In reviewing the management representation letters, we applied the American Institute of Certified Public Accountants' (AICPA) Codification of Auditing Standards, AU Section 333, Management Representations; OMB Bulletin 01-02, Audit Requirements for Federal Financial Statements; and the GAO/President's Council on Integrity and Efficiency (PCIE) Financial Audit Manual (FAM) section 1001, entitled "Management Representations."
HHS's fiscal year 2004 management representation letter did not provide all the information necessary to support Treasury and OMB's preparation of the CFS management representation letter. This in turn impacted our ability to rely on the representations in the CFS management representation letter in combination with individual federal agency representation letters. We identified some needed improvements in three of the five key areas we reviewed. First, HHS did not provide the materiality thresholds used to determine, for representation purposes, any matters that were individually or collectively material to its financial statements. Such individual federal agency thresholds are considered by Treasury and OMB in providing a materiality threshold for the CFS representation letter. Second, the letter included 27 of the 29 representations from the FAM that were applicable to HHS. The other 2 representations were not fully included. Finally, HHS did not include a complete summary of unadjusted misstatements with its management representation letter and also did not distinguish between misstatements affecting intragovernmental accounts and misstatements affecting accounts with the public. We believe that these matters can be easily addressed. We are making three recommendations to HHS's Acting Chief Financial Officer targeted to specific changes needed. Also, we are recommending that the HHS Acting Inspector General, with the contracted independent public accountant, work with the department to help ensure that future management representation letters meet the key conditions noted as needing improvements in this report.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-588R, Financial Audit: The Department of Health and Human Services's Fiscal Year 2004 Management Representation Letter on Its Financial Statements
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June 23, 2005:
Mr. Kerry Weems Acting:
Chief Financial Officer:
Department of Health and Human Services:
Mr. Daniel R. Levinson Acting:
Inspector General:
Department of Health and Human Services:
Subject: Financial Audit: The Department of Health and Human Services's
Fiscal Year 2004 Management Representation Letter on Its Financial
Statements:
As you know, the Secretary of the Treasury, in coordination with the
Director of the Office of Management and Budget (OMB), is required to
annually prepare and submit audited financial statements of the U.S.
government to the President and the Congress. We are required to audit
these consolidated financial statements (CFS) and report on the results
of our work.[Footnote 1] In connection with fulfilling our requirement
to audit the fiscal year 2004 CFS, we evaluated the Department of the
Treasury's (Treasury) financial reporting procedures and related
internal control over the process for compiling the CFS, including the
management representation letter provided us by Treasury and OMB.
Written representation letters from management, required by U.S.
generally accepted government auditing standards, ordinarily confirm
oral representations given to the auditor, indicate and document the
continuing appropriateness of those representations, and reduce the
possibility of a misunderstanding between management and the auditor.
In our report, which is included in the fiscal year 2004 Financial
Report of the United States Government,[Footnote 2] we reported a
limitation on the scope of our work due to identified concerns with the
adequacy of certain federal agencies' management representations on
which Treasury and OMB depend to provide their representations to us
regarding the CFS. Specifically, Treasury and OMB stated that their
representation letter to us on the CFS was based primarily on the
individual federal agency representation letters. Consequently, our
audit considered the content of the individual federal agency letters,
and the incompleteness of certain of these letters impaired our ability
to obtain sufficient evidence in support of our audit of the CFS. This
limitation contributed to our disclaimer of opinion on the CFS. We
performed sufficient audit work to provide the disclaimer of opinion
and issued our audit report, dated December 6, 2004, in accordance with
U.S. generally accepted government auditing standards.
As part of our audit of the fiscal year 2004 CFS, we received and
reviewed selected federal agencies' management representation letters
to assess their adequacy in support of our audit of the CFS. As the
federal government gets closer to an opinion on its financial
statements, it becomes more important that the federal agencies'
management representation letters be complete and reliably prepared.
The purpose of this report is to communicate our observations on the
Department of Health and Human Services's (HHS) fiscal year 2004
management representation letter. Our objective is to help ensure that
future management representation letters submitted by HHS are
sufficient to help support Treasury and OMB's preparation of the CFS
management representation letter and our ability to rely on the
representations in that letter in combination with individual federal
agency representation letters. We reviewed five key areas in each
management representation letter: (1) signatures, (2) materiality
thresholds, (3) representations, (4) summary of unadjusted
misstatements, and (5) reliability of representations. In reviewing the
management representation letters, we applied the American Institute of
Certified Public Accountants' (AICPA) Codification of Auditing
Standards, AU Section 333, Management Representations; OMB Bulletin 01-
02, Audit Requirements for Federal Financial Statements; and the
GAO/President's Council on Integrity and Efficiency (PCIE) Financial
Audit Manual (FAM) section 1001, entitled "Management
Representations."[Footnote 3]
Results in Brief:
HHS's fiscal year 2004 management representation letter did not provide
all the information necessary to support Treasury and OMB's preparation
of the CFS management representation letter. This in turn impacted our
ability to rely on the representations in the CFS management
representation letter in combination with individual federal agency
representation letters.
We identified some needed improvements in three of the five key areas
we reviewed. First, HHS did not provide the materiality thresholds used
to determine, for representation purposes, any matters that were
individually or collectively material to its financial statements. Such
individual federal agency thresholds are considered by Treasury and OMB
in providing a materiality threshold for the CFS representation letter.
Second, the letter included 27 of the 29 representations[Footnote 4]
from the FAM that were applicable to HHS. The other 2 representations
were not fully included. Finally, HHS did not include a complete
summary of unadjusted misstatements with its management representation
letter and also did not distinguish between misstatements affecting
intragovernmental accounts and misstatements affecting accounts with
the public.
We believe that these matters can be easily addressed. We are making
three recommendations to HHS's Acting Chief Financial Officer targeted
to specific changes needed. Also, we are recommending that the HHS
Acting Inspector General, with the contracted independent public
accountant, work with the department to help ensure that future
management representation letters meet the key conditions noted as
needing improvements in this report.
In commenting on a draft of this report, HHS's Deputy Assistant
Secretary Finance and Deputy Inspector General for Audit Services
raised some points regarding the three areas that we noted in our
report as needing improvement, but stated that they will (1) work to
ensure the fiscal year 2005 materiality thresholds are communicated to
Treasury, OMB, and GAO; (2) ensure that their fiscal year 2005
management representation letter includes the FAM language for one of
the representations not fully included; and (3) use the FAM language
related to "known" and "likely" misstatements and carry-forward effect
in their fiscal year 2005 summary of unadjusted misstatements. For the
other representation not fully included, they noted that reference to
stewardship property, plant, and equipment would not be included in the
management representation letter. However, in order for there to be no
misunderstandings, HHS's future management representation letters
should provide additional detail on its stewardship responsibilities.
In addition, the HHS Deputy Assistant Secretary Finance's and Deputy
Inspector General for Audit Services's comments did not address
distinguishing between misstatements affecting intragovernmental
accounts and misstatements affecting accounts with the public on HHS's
summary of unadjusted misstatements. As stated in the report, this
information is needed by us to prepare the governmentwide summary of
unadjusted misstatements.
Background:
In conducting agency financial statement audits, U.S. generally
accepted government auditing standards incorporate financial auditing
fieldwork and reporting standards issued by the AICPA. Such auditing
standards (AU Section 333) require auditors to obtain certain
representations from agency management. These representations are part
of the evidential matter to be considered by the auditor in its audit
of the agency's financial statements. The representations obtained will
depend on the circumstances of the engagement and the nature and basis
of presentation of the financial statements. AU Section 333 discusses
specific representations that should be obtained from management,
including a requirement to attach a schedule of unadjusted financial
statement misstatements for entities with uncorrected misstatements.
In addition, OMB Bulletin 01-02 and FAM section 1001 contain guidance
on preparing federal agencies' management representation letters.
According to the FAM, in addition to the representations included in AU
Section 333, the auditor generally should consider the need to obtain
representations on other matters based on the circumstances of the
audited entity. FAM section 1001A lists 35 specific representations
ordinarily included in the management representation letter and also
includes a requirement to attach a schedule of unadjusted financial
statement misstatements for entities with uncorrected misstatements.
(See enc. I for these representations.) Representations listed in FAM
section 1001A should be customized to the situation of the entity being
audited or excluded if inapplicable. We perform our audit of the CFS in
accordance with the FAM and related auditing standards.
Treasury and OMB are to receive management representation letters from
certain federal agencies. This is important because U.S. generally
accepted government auditing standards require that Treasury and OMB
provide us, as principal auditor of the CFS, a management
representation letter, and their letter depends on the information in
such agencies' management representation letters. In their
representation letter to us for the audit of the fiscal year 2004 CFS,
Treasury and OMB stated that their representations are based primarily
on the representations of those agencies covered by the Chief Financial
Officers (CFO) Act and other selected agencies that were made in
connection with the preparation of these entities' respective financial
statements and provided to OMB and Treasury. For this reason, it is
important that all federal agency representation letters be complete
and reliable.
Objectives, Scope, and Methodology:
In connection with our audit of the fiscal year 2004 CFS, we evaluated
Treasury's financial reporting procedures and related internal control,
including the CFS management representation letter. For the fiscal year
2004 CFS, 33 of the 35 "verifying agencies" submitted audited financial
statements along with their management representation letters to
Treasury.[Footnote 5] In our review of these 33 management
representation letters, our overall objective was to assess their
adequacy as it relates to our audit of the CFS. Specifically, we
reviewed each agency management representation letter to determine
whether the following five key conditions were met:
* the management representation letter was signed by appropriate agency
officials;
* the management representation letter included designation as to the
amounts above which matters were considered material (materiality
thresholds);
* the management representation letter included applicable
representations from the FAM;
* the management representation letter included a properly prepared
summary of unadjusted misstatements for agencies with uncorrected
misstatements; and:
* the representations in the management representation letter were
reliable based on a review of findings in the auditor's report.
This report is based on the audit work we performed for the audit of
the fiscal year 2004 CFS, which was performed in accordance with U.S.
generally accepted government auditing standards.
We requested comments on a draft of this report from HHS's Chief
Financial Officer and Inspector General or their designees. Written
comments from HHS's Deputy Assistant Secretary Finance and Deputy
Inspector General for Audit Services are reprinted in enclosures II and
III, respectively, and are also discussed in the Agency Comments and
Our Evaluation section.
Identified Issues with HHS's Fiscal Year 2004 Management Representation
Letter:
With respect to HHS's fiscal year 2004 management representation
letter, we identified the following three areas that need some
improvement: (1) providing the materiality thresholds used, (2) fully
including applicable representations from the FAM, and (3) including a
summary of unadjusted misstatements. Details regarding these issues are
as follows.
Providing the Materiality Thresholds Used:
Management representations may be limited to matters that are
considered individually or collectively material to the entity's
financial statements, provided that management and the auditor have
reached an understanding on the materiality thresholds to be used.
Likewise, in preparing the overall management representation letter for
the CFS, which is provided to us, Treasury and OMB limit the letter's
representations to matters that are considered to be material. While an
understanding between management and the auditor of materiality
thresholds used is not explicitly required by auditing standards to be
included in the management representation letter, Treasury and OMB use
agency thresholds in providing a materiality threshold for the
governmentwide management representation letter.
For fiscal year 2004, because the materiality thresholds used were not
included in HHS's and a number of other federal agencies' management
representation letters, or otherwise provided to Treasury and OMB,
Treasury and OMB's ability to represent that all matters material to
the CFS were properly considered and included in the overall management
representation letter for the CFS was impaired.
Fully Including Applicable Representations from the FAM:
Written representations from management ordinarily confirm oral
representations made to the auditor during the audit, document the
continuing appropriateness of those representations, and reduce the
possibility of a misunderstanding. To meet auditing standards and OMB
requirements, federal agencies' management and auditors need to ensure
that management representation letters are complete and accurate.
We found that HHS's fiscal year 2004 management representation letter
included 27 of the 29 representations from the FAM that were applicable
to HHS. The 2 other representations were not fully included. For one of
the incomplete representations, the HHS management representation
letter included the following representation intended to cover the
satisfactory title to all owned assets, including stewardship property,
plant, and equipment representation called for by FAM 6. (See enc. I
for this representation.)
"Except for properties capitalized under capital leases, HHS has
satisfactory title to all assets appearing in the balance sheet as of
September 30, 2004, including assigned and unassigned loans; and there
are no liens or encumbrances, nor have any assets been pledged. All
assets to which the HHS has satisfactory title appear in the balance
sheet."
While this representation addresses owned assets, it should also
address stewardship property, plant, and equipment as called for by FAM
6.
For the other incomplete representation, the management representation
letter included the following representation intended to cover the
subsequent events representation called for by FAM 13. (See enc. I for
this representation.)
"No events or transactions have occurred since September 30, 2004 or
are pending that would have a material effect on the financial
statements at that date or for the period then ended, or that are of
such significance in relation to the HHS's affairs to require mention
in a note to the financial statements in order to make them not
misleading regarding the financial position, net cost, changes in net
position, budgetary resources, and the reconciliation of net costs to
budgetary obligations of the HHS."
While this representation addresses the financial statements and notes,
it should also address stewardship information as called for by FAM 13.
When agencies include incomplete representations in their management
representation letters, it impairs our ability to audit the CFS and
Treasury and OMB's ability to make these types of representations in
the CFS management representation letter.
Including a Complete Summary of Unadjusted Misstatements:
U.S. generally accepted government auditing standards require that for
each federal agency with uncorrected misstatements, a summary of
unadjusted misstatements be attached to the agency's management
representation letter. Treasury and OMB use the summaries of unadjusted
misstatements to assess the impact of federal agencies' unadjusted
misstatements on the CFS and make appropriate management
representations to us at the governmentwide level. The summaries are
also used by us, as principal auditor of the CFS, to develop an overall
governmentwide summary of unadjusted misstatements, which is then
attached to the CFS management representation letter prepared by
Treasury and OMB.
Also, in a matter related to the compilation process for the CFS, in
fiscal year 2004, Treasury required agencies to submit a summary of
unadjusted misstatements as part of the closing package using the
standardized format provided for in the Treasury Financial Manual
(TFM). The TFM, however, required additional details to be added to
this summary of unadjusted misstatements than those called for by the
FAM. Specifically, agencies were to also (1) include a description of
the misstatements and (2) distinguish between misstatements affecting
intragovernmental accounts and misstatements affecting accounts with
the public. We need this additional information to develop the overall
governmentwide summary of unadjusted misstatements. In order to avoid
duplication of effort by the agencies in preparing two summaries of
unadjusted misstatements, the additional information should also be
included in the summary of unadjusted misstatements attached to the
management representation letter. As such, we plan to work with PCIE to
modify the FAM to call for these two additional disclosures to be
included in the summary of unadjusted misstatements attached to the
management representation letter.
HHS included a summary of unadjusted misstatements with its management
representation letter, but the summary as called for by the FAM was
incomplete. Specifically, HHS did not (1) separate "known" and "likely"
misstatements and (2) separately identify the carry-forward effect of
the prior year's unadjusted misstatements. In addition, HHS did not
submit a summary of unadjusted misstatements as part of its closing
package to Treasury as required by the TFM. As such, HHS also did not
distinguish between misstatements affecting intragovernmental accounts
and misstatements affecting accounts with the public.
Without a complete summary of unadjusted misstatements from each of the
verifying agencies with uncorrected misstatements, it is not possible
for us, as principal auditor of the CFS, to reasonably determine the
audit risk exposure for each of the line items in the CFS or to prepare
an adequate summary of unadjusted misstatements at the governmentwide
level.
Conclusions:
In three of the five key areas we reviewed, HHS's fiscal year 2004
management representation letter did not provide all the information
necessary to support Treasury and OMB's preparation of the CFS
management representation letter and our ability to rely on the
representations in that letter in combination with individual federal
agency representation letters, including that of HHS. The additional
information needed from HHS is straightforward and should be easy to
address.
Recommendations for Executive Action:
We recommend to HHS's Acting Chief Financial Officer that in the future
the management representation letter:
* include materiality thresholds or such thresholds be provided
separately to Treasury and OMB;
* fully include all representations from the FAM that are applicable to
HHS; and:
* include a complete summary of unadjusted misstatements, if there are
any uncorrected misstatements, that also distinguishes between
misstatements affecting intragovernmental accounts and misstatements
affecting accounts with the public.
We recommend that the HHS Acting Inspector General, with the contracted
independent public accountant, work with the department to help ensure
that future management representation letters meet the key conditions
noted as needing improvements in this report.
Agency Comments and Our Evaluation:
HHS's Deputy Assistant Secretary Finance and Deputy Inspector General
for Audit Services, in separate letters that are reprinted in
enclosures II and III, respectively, provided written comments on our
draft report. Their specific comments and our evaluation of their
comments for each of the issues in the report are discussed below.
HHS's Deputy Assistant Secretary Finance and Deputy Inspector General
for Audit Services stated that their offices believe that the points
raised by us did not affect HHS's audit or our audit of the CFS. With
respect to affecting HHS's audit, the purpose of our review was to
assess the adequacy of selected agencies' management representation
letters in supporting our audit of the CFS. We did not conclude on or
report as to the specific effect of the issues we identified on the
audit of any of the respective agencies' financial statements, as this
was not a focus of our review. In regards to affecting our audit of the
CFS, we disagree. As stated in our report, we reported a limitation on
the scope of our work on the fiscal year 2004 CFS due to identified
concerns with the adequacy of certain federal agencies' management
representations on which Treasury and OMB depend to provide their
representations to us regarding the CFS. Specifically, the
incompleteness of certain of these federal agencies' letters, including
HHS's letter, impaired our ability to obtain sufficient evidence in
support of our audit of the CFS and contributed to our disclaimer of
opinion on the CFS.
Providing the Materiality Thresholds Used:
HHS's Deputy Assistant Secretary Finance and Deputy Inspector General
for Audit Services stated that they did not consider it proper to
include a consolidated materiality threshold in HHS's management
representation letter that is signed by all of the operating divisions.
We are unclear as to why the signing of the letter by the operating
divisions would impact the disclosure of materiality thresholds in the
departmentwide management representation letter. However, we are
pleased that, consistent with our recommendation, HHS stated it will
ensure that the fiscal year 2005 materiality thresholds are
communicated to Treasury, OMB, and GAO.
Fully Including Applicable Representations from the FAM:
As it relates to FAM representation #6, HHS's Deputy Inspector General
for Audit Services stated that reference to stewardship property,
plant, and equipment would not be included in the management
representation letter. He stated that given the nature of the heritage
assets and Indian trust lands, pursuant to Public Law 86-121, the
assets will be returned to the Department of the Interior's Bureau of
Indian Affairs when no longer needed by HHS's Indian Health Service. He
also noted that a separate paragraph regarding the stewardship
reporting was included in HHS's fiscal year 2004 management
representation letter. In addition, HHS's Deputy Assistant Secretary
Finance noted that his office believes that HHS fully recognized its
Indian Health Service's stewardship property, plant, and equipment in
this separate paragraph.
The required supplementary stewardship information section of HHS's
fiscal year 2004 Performance and Accountability Report discusses
stewardship property, plant, and equipment. As such, HHS's management
representation letter should include a representation related to these
assets. The representation should clearly communicate HHS's
responsibilities for the stewardship property, plant, and equipment,
including whether or not HHS has title and if there are any
encumbrances. Although HHS's management representation letter stated
that the required supplementary stewardship information has been
prepared and presented in conformity with the guidelines established by
the Statements on Federal Financial Accounting Standards, it did not
specifically discuss stewardship property, plant, and equipment. As a
result, HHS's future management representation letters should provide
additional detail on its stewardship responsibilities.
As it relates to FAM representation #13, HHS's Deputy Assistant
Secretary Finance and Deputy Inspector General for Audit Services
stated that there were no significant subsequent events related to
stewardship information. The Deputy Inspector General for Audit
Services also stated that his office believes that the representations
provided by management covered the significant portion of the required
supplementary stewardship information by reference to the Centers for
Medicare and Medicaid Services's representation letter. Nevertheless,
the Deputy Assistant Secretary Finance and Deputy Inspector General for
Audit Services stated that their offices will ensure that HHS's fiscal
year 2005 management representation letter includes the FAM language
for this representation. Since (1) the FAM calls for a representation
that there are no material subsequent events or transactions that have
not been properly recorded in the stewardship information and (2) HHS
reports stewardship information at the department level, FAM
representation #13 in the HHS consolidated financial statements
management representation letter should incorporate language related to
stewardship information. We are pleased that HHS has agreed to
incorporate the FAM language into this representation for fiscal year
2005.
Including a Complete Summary of Unadjusted Misstatements:
HHS's Deputy Assistant Secretary Finance and Deputy Inspector General
for Audit Services stated that information contained in the summary of
unadjusted misstatements would allow a reader to classify adjustments
as "known" or "likely". Specifically, they stated that misstatements
labeled "exposure" were classified as likely and all other adjustments
were classified as known. In HHS's summary of unadjusted misstatements,
the word "exposure" was noted for some of the misstatements. However,
the term "known" was not noted on any of the misstatements. It was not
clear during our review as to how this presentation provided the
information called for by the FAM. In addition, HHS's Deputy Assistant
Secretary Finance and Deputy Inspector General for Audit Services
stated that information contained in the summary of unadjusted
misstatements would allow a reader to determine the carry-forward
effect of the prior year's unadjusted misstatements. Specifically, they
indicated that the carry-forward effect was included on the summary
under the "turnaround effect" line. However, the turnaround effect on
the summary only included one amount as to the effect on net income and
did not show any effect on the related balance sheet line item(s). As a
result, it was unclear that the "turnaround effect" was the carry-
forward effect. Therefore, in order for there to be no
misunderstandings, in future management representation letters, the
language and presentation called for by the FAM should be used to
prepare the summary of unadjusted misstatements. We are pleased that
HHS's Deputy Assistant Secretary Finance and Deputy Inspector General
for Audit Services stated that they will use the FAM language in their
fiscal year 2005 management representation letter.
HHS's summary of unadjusted misstatements also did not distinguish
between misstatements affecting intragovernmental accounts and
misstatements affecting accounts with the public. HHS's Deputy
Assistant Secretary Finance and Deputy Inspector General for Audit
Services comments did not address this issue. As stated in the report,
this information is also needed by us to prepare the governmentwide
summary of unadjusted misstatements.
Within 60 days of the date of this report, we would appreciate
receiving a written statement on actions taken to address these
recommendations.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Homeland Security and
Governmental Affairs; the Subcommittee on Federal Financial Management,
Government Information, and International Security, Senate Committee on
Homeland Security and Governmental Affairs; the House Committee on
Government Reform; and the Subcommittee on Government Management,
Finance, and Accountability, House Committee on Government Reform. In
addition, we are sending copies to the Fiscal Assistant Secretary of
the Treasury and the Controller of OMB. Copies will be made available
to others upon request. This report is also available at no charge on
GAO's Web site at [Hyperlink, http://www.gao.gov].
We appreciate the courtesy and cooperation extended to us by your staff
throughout our work. We look forward to continuing to work with your
offices to help improve financial management in the federal government.
If you have any questions about the contents of this report, please
contact me at (202) 512-3406.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
Enclosures --3:
[End of section]
Enclosure I: Representations in FAM 1001A:
Guidance contained in FAM 1001 and FAM 1001A deals with the management
representations that the auditor should obtain from current management
as part of the audit. This guidance also acknowledges that judgment
needs to be exercised to obtain representations that depend on the
circumstances of the engagement and the nature and basis of
presentation of the financial statements. Representations given in FAM
section 1001A should be customized to the situation of the entity being
audited, and additional representations may need to be obtained.
FAM 1001A lists 27 representations that are ordinarily included, if
applicable, in the management representation letter that an agency
provides to the auditor. For representations 3, 11, 16, and 18, the
agency should address three separate components. As such, each agency
is ordinarily expected to make a total of 35 representations.
Representations 18, 19, 20, and 21 are not applicable unless the agency
received an opinion on its internal control. In addition,
representations 22, 23, and 24 address the three requirements of the
Federal Financial Management Improvement Act of 1996 and are only
applicable to the 24 CFO Act agencies. The 35 representations in FAM
1001A are as follows.
1. We are responsible for the fair presentation of the financial
statements and stewardship information in conformity with U.S.
generally accepted accounting principles.
2. The financial statements are fairly presented in conformity with
U.S. generally accepted accounting principles.
3. We have made available to you all:
* financial records and related data;
* where applicable, minutes of meetings of the Board of Directors [or
other similar bodies, such as congressional oversight committees] or
summaries of actions of recent meetings for which minutes have not been
prepared; and:
* communications from the Office of Management and Budget (OMB)
concerning noncompliance with or deficiencies in financial reporting
practices.
4. There are no material transactions that have not been properly
recorded in the accounting records underlying the financial statements
or disclosed in the notes to the financial statements.
5. We believe that the effects of the uncorrected financial statement
misstatements summarized in the accompanying schedule are immaterial,
both individually and in the aggregate, to the financial statements
taken as a whole. [If management believes that certain of the
identified items are not misstatements, management's belief may be
acknowledged by adding to the representation, for example, "We believe
that items XX and XX do not constitute misstatements because
[description of reason]."]
6. The [entity] has satisfactory title to all owned assets, including
stewardship property, plant, and equipment; such assets have no liens
or encumbrances; and no assets have been pledged.
7. We have no plans or intentions that may materially affect the
carrying value or classification of assets and liabilities.
8. Guarantees under which the [entity] is contingently liable have been
properly reported or disclosed.
9. Related party transactions and related accounts receivable or
payable, including assessments, loans, and guarantees, have been
properly recorded and disclosed.
10. All intraentity transactions and balances have been appropriately
identified and eliminated for financial reporting purposes, unless
otherwise noted. All intragovernmental transactions and balances have
been appropriately recorded, reported, and disclosed. We have
reconciled intragovernmental transactions and balances with the
appropriate trading partners for the four fiduciary transactions
identified in Treasury's Intra-governmental Fiduciary Transactions
Accounting Guide, and other intragovernmental asset, liability, and
revenue amounts as required by the applicable OMB Bulletin.
11. There are no:
* possible violations of laws or regulations whose effects should be
considered for disclosure in the financial statements or as a basis for
recording a loss contingency,
* material liabilities or gain or loss contingencies that are required
to be accrued or disclosed that have not been accrued or disclosed, or:
* unasserted claims or assessments that are probable of assertion and
must be disclosed that have not been disclosed.
12. We have complied with all aspects of contractual agreements that
would have a material effect on the financial statements in the event
of noncompliance.
13. No material events or transactions have occurred subsequent to
September 30, 20X2 [or date of latest audited financial statements],
that have not been properly recorded in the financial statements and
stewardship information or disclosed in the notes.
14. We are responsible for establishing and maintaining internal
control.
15. We acknowledge our responsibility for the design and implementation
of programs and controls to prevent and detect fraud (intentional
misstatements or omissions of amounts or disclosures in financial
statements and misappropriation of assets that could have a material
effect on the financial statements).
16. We have no knowledge of any fraud or suspected fraud affecting the
[entity] involving:
* management,
* employees who have significant roles in internal control, or:
* others where the fraud could have a material effect on the financial
statements.
[If there is knowledge of any such instances, they should be described.]
17. We have no knowledge of any allegations of fraud or suspected fraud
affecting the [entity] received in communications from employees,
former employees, or others. [If there is knowledge of any such
allegations, they should be described.]
18. Pursuant to 31 U.S.C. 3512(c), (d) (commonly known as the Federal
Managers' Financial Integrity Act), we have assessed the effectiveness
of the [entity's] internal control in achieving the following
objectives:
* reliability of financial reporting--transactions are properly
recorded, processed, and summarized to permit the preparation of
financial statements and stewardship information in accordance with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use or
disposition;
* compliance with applicable laws and regulations--transactions are
executed in accordance with (i) laws governing the use of budget
authority and with other laws and regulations that could have a direct
and material effect on the financial statements and (ii) any other
laws, regulations, and governmentwide policies identified by OMB in its
audit guidance; and:
* reliability of performance reporting--transactions and other data
that support reported performance measures are properly recorded,
processed, and summarized to permit the preparation of performance
information in accordance with criteria stated by management.
[If the entity bases its internal control assessment on suitable
criteria other than 31 U.S.C. 3512(c), (d), this item should cite the
criteria used (for example, Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission).]
19. Those controls in place on September 30, 20X2 [or date of latest
audited financial statements], and during the years ended 20X2 and
20X1, provided reasonable assurance that the foregoing objectives are
met. [If there are material weaknesses, the foregoing representation
should be modified to read:
* Those controls in place on September 30, 20X2, and during the years
ended 20X2 and 20X1, provided reasonable assurance that the foregoing
objectives are met except for the effects of the material weaknesses
discussed below or in the attachment.
* or: Internal controls are not effective.
* or: Internal controls do not meet the foregoing objectives.]
20. We have disclosed to you all significant deficiencies in the design
or operation of internal control that could adversely affect the
entity's ability to meet the internal control objectives and identified
those we believe to be material weaknesses.
21. There have been no changes to internal control subsequent to
September 30, 20X2 [or date of latest audited financial statements], or
other factors that might significantly affect it. [If there were
changes, describe them, including any corrective actions taken with
regard to any significant deficiencies or material weaknesses.]
22. We are responsible for implementing and maintaining financial
management systems that substantially comply with federal financial
management systems requirements, federal accounting standards (U.S.
generally accepted accounting principles), and the U.S. Government
Standard General Ledger at the transaction level.
23. We have assessed the financial management systems to determine
whether they substantially comply with these federal financial
management systems requirements. Our assessment was based on guidance
issued by OMB.
24. The financial management systems substantially complied with
federal financial management systems requirements, federal accounting
standards, and the U.S. Government Standard General Ledger at the
transaction level as of [date of the latest financial statements].
[If the financial management systems substantially comply with only one
or two of the above elements, this representation should be modified as
follows:
* As of [date of financial statements], the [entity's] financial
management systems substantially comply with [specify which of the
three elements for which there is substantial compliance (e.g., federal
accounting standards and the SGL at the transaction level)], but did
not substantially comply with [specify which of the elements for which
there was a lack of substantial compliance (e.g., federal financial
management systems requirements)], as described below (or in an
attachment).]
[If the financial management systems do not substantially comply with
any of the three elements, the following paragraph should be used
instead:
* As of [date of financial statements], the [entity's] financial
management systems do not substantially comply with the federal
financial management systems requirements.]
[If there is a lack of substantial compliance with one or more of the
three requirements, identify herein or in an attachment all the facts
pertaining to the noncompliance, including the nature and extent of the
noncompliance and the primary reason or cause of the noncompliance.]
25. We are responsible for the [entity's] compliance with applicable
laws and regulations.
26. We have identified and disclosed to you all laws and regulations
that have a direct and material effect on the determination of
financial statement amounts.
27. We have disclosed to you all known instances of noncompliance with
laws and regulations.
[End of section]
Enclosure II: Comments From the Office of the Chief Financial Officer
at the Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Office of the Secretary:
JUN 10 2005:
TO: Gary T. Engel:
Director, Financial Management and Assurance:
Government Accountability Office Washington,
Washington, D.C. 20201:
FROM: George Strader:
Deputy Assistant Secretary Finance:
SUBJECT: Department of Health and Human Services, Office of Inspector
General Comments on GAO-05-588R HHS' Management Representation Letter
Draft Report:
Thank you for the opportunity to comment on your draft report entitled
Financial Audit: The Department ofHealth and Human Services' Fiscal
Year 2004 Management Representation Letter on Its Financial Statements.
I am responding on behalf of Kerry Weems, Acting Chief Financial
Officer.
We agree that it is important to have a complete and accurately
prepared Management Representation Letter that supports both the HHS
and the Governmentwide consolidated financial statements. We have
worked consistently with our OIG and our auditors Ernst and Young to
produce such a letter. We believe our Management Representation Letter
served that purpose and that the points raised by the GAO in no way
affected our HHS audit or that of the CFS.
We know that our OIG has already commented in detail on your report. We
totally agree with their comments and wish to make these additional
remarks.
Providing the Materiality Thresholds. Our office and that of the OIG
did not consider it proper to include a consolidated threshold that
would be signed by all OPDIV managers. What might be of significant
materiality at the HHS level would not be applicable at all OPDIVs,
particularly the smaller organizations. We shall work with the OIG and
E&Y to ensure materiality thresholds are separately conveyed to GAO,
OMB and Treasury in FY 2005.
Fully Including Applicable Representations From the FAM. We believe we
fully recognized the Indian Health Service's stewardship PP&E in the
separate paragraph regarding stewardship reporting in the FY 2004
management representation letter. With reference to events or
transactions occurring since September 30, 2004, there were none with
respect to stewardship property. We shall, however, ensure that our FY
2005 management representation follows closely your recommendation for
this disclosure.
Including Complete Summary of Unadjusted Misstatements. GAO has noted
that our Management Representation Letter did not separately identify
the unadjusted misstatements as "known" and "likely" misstatements as
well as identity of the carry-forward effect of prior year's unadjusted
misstatements. Our use of the term "exposure" meant the adjustments
were "likely" and all others were classified as "known." Summarily, the
use of the term "turnaround effect" for prior year's unadjusted
misstatements is the same as GAO's term "carry-forward-effect." We
shall use the preferred language in our FY 2005 management
representation letter.
Again, we thank you for the opportunity to provide comments. We request
that our comments be considered in the revision of the draft report or
be incorporated in the final report. Should you wish to discuss the
comments, please contact Paul Weinberger, at (202) 260-6572, or through
e-mail at Paul.Weinberger@hhs.gov.
[End of section]
Enclosure III: Comments From the Office of the Inspector General at the
Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Office of Inspector General:
Washington, D.C. 20201:
JUNE 6 2005:
TO: Gary T. Engel:
Director, Financial Management and Assurance:
Government Accountability Office:
Washington, DC 20548:
FROM: Joseph E. Vengrin:
Deputy Inspector General for Audit Services:
SUBJECT: Department of Health and Human Services, Office of Inspector
General Comments on GAO-05-588R HHS' Management Representation Letter
Draft Report:
Thank you for the opportunity to comment on your draft report entitled
Financial Audit The Department of Health and Human Services' Fiscal
Year 2004 Management Representation Letter on Its Financial Statements.
We agree with the Government Accountability Office (GAO) that it is
important that Federal agencies' management representation letters be
complete and reliably prepared and that the letters should help support
Treasury and Office of Management and Budget (OMB) preparation of the
Governmentwide consolidated financial statement (CFS) management
representation letter. However, we do not believe that the lack of
information in the fiscal year (FY) 2004 Department of Health and Human
Services (HHS) management representation letter affected GAO's ability
to rely on the representations in the CFS management representation
letter and individual Federal agency representation letters.
Furthermore, we believe that the areas that GAO identified as
incomplete were not significant and would not limit the scope of audit
work or impair GAO's ability to obtain sufficient evidence in support
of its audit of the CFS. Our comments on the three areas that GAO cited
as needing improvement follow.
Providing the Materiality Thresholds:
On page 8 of the draft report, GAO stated, "While an understanding
between management and the auditor of materiality thresholds used is
not explicitly required by auditing standards to be included in the
management representation letter, Treasury and OMB use agency
thresholds in providing a materiality threshold for the government-wide
management representation letter."
We concur that auditing standards do not require that materiality
thresholds be included in the management representation letter. Because
of the nature and complexity of the HHS organization of operating
divisions (OPDIV) and timing of the management representation letter,
the Office of Inspector General (OIG) and the principal auditor
determined that it was not appropriate to include a consolidated
threshold in the HHS representation letter that is signed by all of the
OPDIVs. Including a consolidated materiality threshold, as GAO
suggests, would have little applicability over our smaller OPDIVs, such
as the Food and Drug Administration. The FY 2004 HHS representation
letter did, however, refer to the Center for Medicare & Medicaid
Services (CMS) representation letter, which contained a threshold
amount.
Thus, although we agree that materiality thresholds should be provided
to GAO, we do not believe that the consolidated HHS threshold or the
separate OPDIV thresholds should be, or are required to be, contained
in the HHS management representation letter. OIG will work with
auditors and management to ensure that the FY 2005 representation
threshold(s) is properly communicated to GAO, OMB, and Treasury.
Fully Including Applicable Representations From the FAM:
GAO indicated that the representation made below should also address
stewardship property, plant, and equipment:
Except for properties capitalized under capital leases, HHS has
satisfactory title to all assets appearing in the balance sheet as of
September 30, 2004, including assigned and unassigned loans; and there
are no liens or encumbrances, nor have any assets been pledged. All
assets to which the HHS has satisfactory title appear in the balance
sheet.
Given the nature of the heritage assets and Indian trust land described
in the HHS stewardship schedule (both types relate to the Indian Health
Service OPDIV), pursuant to Public Law 86-121 the assets will be
returned to the Department of the Interior's Bureau of Indian Affairs
when no longer needed by the Indian Health Service in connection with
its general PP&E. Therefore, HHS would not include reference to the
stewardship information in this paragraph of the management
representation letter. A separate paragraph regarding the stewardship
reporting was included in the FY 2004 HHS management representation
letter: "The required supplementary information, required supplementary
stewardship information, and supplementary information included with
the financial statements has been prepared and presented in conformity
with the guidelines established by the SFFAS."
In addition, GAO indicated that the representation below should also
address stewardship information:
No events or transactions have occurred since September 30, 2004 or are
pending that would have a material effect on the financial statements
at that date or for the period then ended, or that are of such
significance in relation to the HHS's affairs to require mention in a
note to the financial statements in order to make them not misleading
regarding the financial position, net cost, changes in net position,
budgetary resources, and the reconciliation of net costs to budgetary
obligations of the HHS.
Although this paragraph does not reference stewardship information, we
believe that the representations provided by management covered the
significant portion of the required supplementary stewardship
information by reference to the CMS management representation letter.
The FY 2004 CMS representation letter included the following statement:
"No material events or transactions have occurred subsequent to
September 30, 2004, that have not been properly recorded in the
consolidated financial statements and required supplementary
stewardship information or disclosed in the notes thereto."
In addition, discussions with management have indicated that no
significant subsequent events occurred as related to the HHS
stewardship information. However, OIG will work with the auditors and
management to ensure that the "required supplementary stewardship
information" is referred to in the subsequent events paragraph to be
included in the FY 2005 HHS management representation letter.
Including a Complete Summary of Unadjusted Misstatements:
GAO noted that the summary of unadjusted misstatements submitted with
the management representation letter was incomplete. Specifically, HHS
did not (1) separate "known" and likely" misstatements or (2)
separately identify the carry-forward effect of the prior year's
unadjusted misstatements.
The summary of unadjusted misstatements attached to the FY 2004
management representation letter included a detailed description of the
proposed transactions that would allow a reader to classify the
adjustments as "known" and "likely." In summary, those items labeled
"exposure" were classified as likely and all other adjustments were
classified as known. However, OIG will work with the auditors and
management to ensure that the summary of unadjusted misstatements
attached to the FY 2005 management representation letter explicitly
states whether the adjustments were known or likely.
The carry-forward effect of the prior year's unadjusted misstatements
was included in the schedule of unadjusted misstatements attached to
the FY 2004 management representation letter. The amount was reported
on the "turnaround effect" line on page 2 of the schedule. OIG will
work with the auditors and management to ensure that the schedule
refers to the "turnaround effect" as the "carry-forward effect" on the
summary of unadjusted misstatements attached to the FY 2005 management
letter.
Again, we thank you for the opportunity to provide comments. We request
that our comments be considered in the revision of the draft report or
be incorporated in the final report. Should you wish to discuss the
comments, please contact David Long, Assistant Inspector General for
ROIT Audits, at (202) 619-1157, or through e-mail at
david.long@oig.hhs.gov.
[End of section]
(198367):
FOOTNOTES
[1] The Government Management Reform Act of 1994 has required such
reporting, covering the executive branch of government, beginning with
financial statements prepared for fiscal year 1997. 31 U.S.C. § 331
(e). The federal government has elected to include certain financial
information on the legislative and judicial branches in the CFS as
well.
[2] The fiscal year 2004 Financial Report of the United States
Government was completed by the Department of the Treasury on December
15, 2004, and is available through both GAO's Web site at www.gao.gov
and Treasury's Web site at www.fms.treas.gov/fr/index.html.
[3] GAO, GAO/PCIE: Financial Audit Manual: Update, GAO-04-1015G
(Washington, D.C.: July 30, 2004), an update to Financial Audit Manual:
Volumes 1 and 2, GAO-01-765G (Washington, D.C.: Aug. 1, 2001).
[4] The FAM lists 27 representations that are ordinarily included, if
applicable, in the management representation letter that an agency
provides to the auditor. For 4 of the representations, the agency is
required to address three separate components. As such, each agency is
ordinarily expected to make a total of 35 representations. Six of the
35 representations are not applicable unless the agency received an
opinion on its internal control. Since HHS did not receive an opinion
on its internal control for fiscal year 2004, only 29 of the 35
representations were applicable to HHS's fiscal year 2004 management
representation letter.
[5] See Treasury Financial Manual, vol. I, part 2, ch. 4700, for a list
of the 35 agencies. These agencies, for fiscal year 2004, consisted of
23 CFO Act agencies and 12 material other agencies. The 33 agencies we
reviewed did not include the U.S. Securities and Exchange Commission
and the Smithsonian Institution because these audits were not complete
before the fiscal year 2004 Financial Report of the United States
Government was issued. The Department of Homeland Security (DHS)
Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct.
16, 2004), added DHS to the list of CFO Act agencies, increasing the
number of CFO Act agencies again to 24 for fiscal year 2005.
